Thursday, June 19, 2008

Not out of the Woods.

UCLA’s Anderson school of business reported that they see the first flicker light at the end of the housing collapse in California, citing year-over-year transaction increases in areas like Riverside (one of the hardest hit by the bubble). To me this just smacks of analysts wanting to be the first to call bottom without consideration to the underlying fundamentals of the California market.
The two most important of which are the fact that a majority of the loans in the more expensive markets were made with a combination of stated (a/k/a fake) income and exotic loan products like option arms and interest only loans that have yet to recast or adjust. How can anyone call for a bottom and say that foreclosures will ease in 2009 with a clear wave of resets looming on the horizon for 2009-2012 that are actually more severe in nature than ARM resets? That’s irresponsible.
An option ARM reset can increase the monthly payment requirement of a borrower 4-5 fold. With no equity to refinance these homes are going to go cascading in to foreclosure further hurting the market. Any one that does not take this eventuality as a serious threat to the market is just plain ignorant. It’s going to be messy.
See the graph and you tell me if we’re out of the woods yet. As an anecdotal story I had a specuvestor call my office seeking a 5% down NEGAM for a 1.4 million dollar home in Westwood that he thought was a bargain because it was reduced from 1.7 million.
It won't be done until 2012. All the 10's of billions of pick-a-pay time bomb loans haven't reset to fully amortizing yet. As a sign that it was a poisonous product WAMU(the 2nd biggest lender in this area) announced yesterday that they will no longer offer this product. Maybe the smart money crowd knows something the specuvestors don't about real estate and the $34B worth of NEGAMs WAMU has on the books. I will let these charts speak for themselves: